The Power of Sale: Mortgage Law and Lending

Question 1

A mortgage is a “conveyance, assignment or demise of real or personal estate as security for the repayment of money borrowed.”^[1] The money lender is known as the Mortgagee has an interest in the land^[2] as they have granted the Mortgagor, or legal owner of the personal estate, a mortgage and would have had it registered as a charge on the Land Registry. One of the first remedies available to a lender is the dispossession of the property through foreclosure although this is one of the less favourable remedies. A mortgagee cannot seek foreclosure before the contractual date or obligation has passed^[3] and the process requires a court order^[4] which has the effect of vesting the mortgagor’s estate in the mortgagee to assure full repayment of the debt.^[5] The reason this remedy is unfavourable is because it is viewed as unfair on the mortgagor. This is because if the value of the estate is greater than the actually debt owed the mortgagor has no right to the excess, however, a right to appeal exists whereby the mortgagor can request the estate to be sold rather than face foreclosure.^[6] If successful the mortgagor will receive the residue of the sale after the mortgage, debts and any interest are paid. Disadvantageous to the mortgagee is the plausibility that the court will reopen the entire lending situation and allow the mortgagor to redeem the property under certain circumstances detailed in Campbell v Holyland,^[7] which includes potentially re-evaluation of the situation after sale of the estate. Thus foreclosure remains the primary remedy of an equitable mortgagee and is often deemed to be the most extreme remedy due to its unfairness to the mortgagor and its improbability that the entire debt will be extinguished.

The power of sale arises in a mortgage, which shows no contrary intention and is created by deed and already passed the legal date of redemption^[8], when the mortgage money has become due but it is not exercisable until one of the following conditions is fulfilled. The mortgagor will have to verify if a notice requiring payment has been served on him a minimum of three month prior to proceedings, as default on payment for three months is required^[9] unless some of the interest was payable and in arrears for at least two months^[10] or he was in breach of a covenant in the mortgage deed or some other provision of the LPA 1925.^[11] When a mortgage claim includes land that is made up of at lease one residential property, the mortgagee must send notice to the property no less than 14 days before the hearing addressed to the owner or occupiers. When the hearing comes to court it will be required for the mortgagee to give the court a copy of the notice and evidence that it had been served to the property although not necessarily to the actual mortgagor which is disadvantageous to any absent mortgagors perhaps for business reasons.

The main problem for lenders arises surrounding the sale price for the property thus; many mortgagees employ third parties to delegate the sale in order to alleviate the burden of liability upon themselves. The mortgagee has an equitable duty to ‘obtain a proper price’^[12] on the property should they exercise their right to sale. However, an open sale by auction, even where prices are low, satisfies the mortgagee’s duty.^[13] The mortgagor specifically has a right to appeal in this instance to the courts if there is a valid assumption that he would have obtained a higher price for the property sold, perhaps as he may be aware of an unregistered prescription and/or pending planning permission which could have augmented the price significantly and perhaps clear the outstanding mortgage completely and produce a residue for the mortgagor.^[14] Precedent states that if the sale does not realise sufficient funds to repay the mortgagee, the mortgagee may sue in contract for the balance of the debt.^[15] Jonathan Parker LJ, giving the judgment of the Court made some useful comments about the methods of advertising and modes of sale^[16]. A mortgagee will not be liable if he takes reasonable care to assess the market value.^[17] “Whereas once disappointed mortgagees turned to Barclays Bank v O’Brien as a means of escape, only to find their exit route largely cut off by Royal Bank of Scotland v Etridge, so too the majority of last ditch attempts to challenge the sale price are now being cut off by a concerted judicial effort.”^[18] The mortgagor must be aware that the duty to obtain the best price is only an equitable duty thus rendering it inflexible and unyielding.

The mortgagee’s right to take possession is automatic because the arrangements of the mortgage will have already vested the legal estate in possession with the mortgagee and it becomes exercisable even if the mortgagor is not in arrears or in default.^[19] The court retains the power to restrain any unjust use of this remedy and the receipt of rents and profits from tenants may also constitute terms of possession. The mortgagee has the option of taking possession of the premises and managing it in order to generate an income which could have been used to satisfy the mortgagor’s obligations bearing in mind that repossession does not stop the interest on the mortgage from accumulating. Section 36 of the Administration of Justice Act (AJA) 1970 (subsequently amended by section 8 of the AJA 1973) will allow the mortgagor to apply to the court for a postponement in its discretion if it becomes apparent that he would have been able to pay back the outstanding debt and any other sums due under the mortgage within a reasonable time. However, this option was only available to the mortgagor up until the time of actual recovered possession.^[20] A reasonable period^[21] must have transpired before the possession was completed in order to give the mortgagor a sufficient means to reply to any correspondence that may have been sent to him. It is within this reasonable time that the mortgagor can demonstrate any planning intentions and permissions which reinforce his intention to repay the mortgage with the valuation report so as to rule out any implication of a mere hope to repay.^[22] The mortgagor might seek redress of the possession if he can prove that there existed no justifiable reason for the possession to take place under the mortgage arrangements that existed with mortgagee and no genuine need to seek possession was justified in regards to protecting the lender’s security.^[23]

Lastly, the lender has a right to appoint a receiver, which entails the appointment of an individual by the mortgagee to act as an agent for the mortgagor with the power to collect rents and profits. This is the most common remedy where the mortgagor has granted a lease and thus existing rents exist for interception by the agent. The power to appoint arises and is exercisable in the similar situation as outlined under power of sale and should the mortgagee already be in possession of the property the appointment need only be instigated in writing under s.109 LPA 1925. Once appointed the receiver must pay any rents or taxes due, interests in priority of the mortgage, his commission, interest on the mortgage and lastly, if directed in writing makes payments towards the discharge of the principle sum owed to the lender. It is possible that a mortgagee would find it more to their advantage if they exercised their right to sue on the personal covenant that is outlined in the mortgage deed. This is to insure repayment of the loan immediately even if more than the property mortgaged is required to be sold. This is a much more beneficial remedy as the mortgagee retains their priority of repayment and is more likely to be paid back faster than through the repayments of the receiver. This remedy is also beneficial to lenders as the right will arise if the sale of the property does not discharge the entire amount owed.

Question 2

1)

An easement is an intangible right in land and a right that is enjoyed by a person over his neighbour’s property either in the form of a right of way, right of passage for water etc… which is enjoyed free of charge.^[24] Four essential elements exist for an easement to exist; they are derived from the case of Re Ellenborough Park.^[25] The first is a dominant and servient tenement must exist and the easement must be connected to land and cannot be independent of ownership in land. Secondly, the easement must accommodate the dominant tenement and “must have some natural connection with the estate as being for its benefit”^[26], in this case a right to access the property is a natural connection and provides a definite benefit to the owners. Lastly, the owner of the dominant and servient tenements must not be one in the same and the easement must be able to become the subject matter of a grant. As the owner of the common is different to Lord Sutton the criteria is fulfilled in his case although this may not have been the case for the previous owner. Also the right of way can be conveyed in a grant as it is identifiable so long as a specific tract has been used continuously by the family and they are not merely driving over the common in a random and haphazard way.

Prima facie it would appear that a positive easement exists in regards to the right of way used by cars to access Gunnerside Manor although it is not a legal interest in the land as it has not been created by deed or prescription. If circumstances are as stated by the family, the previous owner’s use of the right of way would have passed to them with the transfer of the land without having been specifically mentioned and by virtue of s.62(1) LPA 1925 as “a conveyance shall operate to convey with land all easements, rights and advantages whatsoever…” to the purchaser so long as no contrary intention or objection is raised at the time of sale.

2)

Prescription is an easement that has been in use for a long time thus prompting a deed created by statute to be in force. Prescription is where no person can show a title to what he claims as a right other than having enjoyed the pleasure or access immemorially without force^[27], without secrecy^[28] and without permission^[29] against another fee simple owner^[30]. The difference between custom and prescription is that custom pertains to “local usage and is [not] annexed to any person, whereas prescription is a personal usage”^[31] The Prescription Act 1832 s.4 states that the use of the land must be without interruption and use must be continuous although continuous cannot be taken literally allowing regular usage to suffice.^[32] The right to prescription is included under section 1 of the Prescription Act 1832 and in this case as the right of way across the common has been used for 30+ years, thus qualifying it for consideration as a prescription as 20 years is outlined as the ‘short period’ required to forgo defeat of a claim even if proof exists that shows use began after 1189, the date of legal memory.^[33] The prescription does not depend on common law rules, nor does it depend on presumption of a lost modern grant^[34] although both could be used to enforce the prescription as the 30 years of continuous use have been completed. However, if at any time during the period of use, Lord Sutton had received permission expressly either in writing or orally this will defeat a claim as the right will have been used precariously. A negative prescription could be enforced because the owner of the common lost their right to challenge under the Statutes of Limitation and if action does not take place within twelve years of the wrongful possession the owner will lose his rights to the Property.^[35] Once granted a prescription, Lord Sutton should have it registered as a Class D(iii) under the rules of the Land Charges Act 1972 or as an overriding interest.^[36]

3)

A restrictive covenant is an interest in the land of another recognised first by equity whereby the owner of one piece of land may hold a restrictive covenant over the land of another. The covenant restricts the second owner’s use of the property and is generally used as a means by which developers of land can maintain the amenities of an area. The covenant must be outlined in a deed which demonstrates that Lord Sutton obtained the promise of the owner of the field not to do certain things, in this case building work without his permission. Mr. Giles claims he was not party to the deed therefore, the courts will not enforce the covenant against Mr. Giles even if the deed had been made between Lord Sutton and the previous owner under the rules of privity to contract. However exceptions exist which gives the person trying to enforce the covenant the right, enforceable in equity, against the current owner. Five requirements exist in these circumstances which are outlined below.

Firstly, the covenant must touch and concern the land, meaning it must relate to the use or value of the land in the terms of a proprietary obligation. A test to determine this is set out by Lord Oliver in Swift Investments^[37] which asks whether the covenant could benefit any owner of Gunnerside Manor, whether the covenant affects the nature, quality or value of the land and is the covenant expressed as a personal obligation. Secondly, the covenant must be restrictive or negative in nature which in this case is likely to be true, as was the case in Tulk v Moxhay^[38] whereby a covenant not to build was held to be negative. Thirdly, the covenant must have been imposed to benefit Gunnerside Manor by the original coventee in order to benefit the land. The land must be identifiable although it need not necessarily be the same size as when the original covenant was made. The next requirement is that the burden of the restrictive covenant must be intended to run with the land. This obligation is fulfilled by evidence which establishes that the burden was meant to be proprietary instead of personal. The burden of a restrictive covenant is deemed to be attached to the land by virtue of s.79(1) of the LPA whereby “a covenant relating to land of the covenantor shall unless contrary intention is expressed be deemed to be made by the covenantor on behalf of himself, his successors in title….” which results in the burden being annexed to the land in order that the burden may run. Therefore, prima facie it is likely that no contrary intention will arise if the original instrument does not contain any words or expressions which indicate such an intention. In registered land the person against whom the restrictive covenant is being enforced is registered under the LRA, therefore the covenant must be registered as a minor interest against the burdened land in order to be binding.^[39] If it is not registered it will become void and unenforceable forever. The only exemption to this rule under registered land that would benefit Mr. Giles is if he was registered as proprietor yet not the purchaser of the land for valuable consideration or he is someone who purchased merely an equitable interest in the land.

BIBLIOGRAPHY

DIXON, M. (1999) Principles of Land Law 3^rd Edition London: Cavendish Publishing Ltd.

MACKENZIE, J-A. AND PHILLIPS, M. (2002) Textbook on Land Law 9^th Edition Oxford: Oxford University Press.

MAYNARD, J. (2005) The Boundaries Problem Website:

http://www.boundary-problems.co.uk/framehome.htm

MURDOCH, J. (13 Nov. 2004) “The seeds of dissent” Explanation of the Case: Estates Gazette.

PENNER, J.E. (2002) Mozley & Whitley’s Law Dictionary 12^th Edition London: LexisNexis Butterworth’s.

SMITH, R.J. (2000) Property Law 3^rd Edition London: Pearson Educational Ltd.

1

Footnotes

^[1] Penner (2001) page 232.

^[2] s.1(2)(c) LPA 1925.

^[3] Williams v Morgan [1906] 1 Ch 804

^[4] Re Farnol Eades Irvine & Co. Ltd. [1915] 1 Ch 22

^[5] LPA 1925, ss. 88(2) and 89(2)

^[6] Ibid s.91(2)

^[7] 918770 7 Chd 166

^[8] s. 101 LPA 1925.

^[9] s. 103 LPA 1925.

^[10] ibid

^[11] Bailey v Barnes [1894] 1 Ch 25.

^[12] Raja v Lloyds TSB Bank plc (2001) Lloyds Rep Bank 113.

^[13] Cuckmere Brick Co. v Mutual Finance [1971] Ch 949.

^[14] See Barrett v Halifax Building Society (1995) 28 HLR 634.

^[15] Rudge v Richens (1873) LR 8 CP 358.

^[16] Michael v Miller [2004] EWCA Civ 282

^[17] South Australia Asset Management Corp. v. York Montague Ltd [1997] AC 191 at 221

^[18] Murdoch (2004) page 149.

^[19] Four Maids Ltd. V Dudley Marshall Properties Ltd (1957) Ch 317.

^[20] Mortgage Agency Services v Bal [1998]

^[21] A ‘reasonable period’ can only be determined in light of the circumstances of each case. National and Provincial Building Society v Lloyd [1996] 1 All ER 630.

^[22] ibid

^[23] Quennell v Maltby [1979] 1 All ER 568.

^[24] Derived from Penner (2001) page 121.

^[25] [1956] Ch 131

^[26] Bailey v Stephens (1862) 12 CBNS 91 per Byles J.

^[27] Eaton v Swansea Waterworks Co. (1851) 17 QB 267.

^[28] See Liverpool Corporation v Coghill & Sons Ltd. [1918] 1 Ch 307.

^[29] Arkwright v Gell (1839) 5 M & W 203.

^[30] See Kilgour v Gaddes [1904] 1 KB 457.

^[31] Penner (2001) page 270.

^[32] See Hollins v Verney (1884) 13 QBD 304.

^[33] c. 39 Statute of Westminster the First (1275)

^[34] See Tehidy Minerals Ltd. v Norman [1971] 2 QB 528 which provided a rehabilitation of the doctrine.

^[35] See Limitation Act 1980 and s12 Law of Property Act 1925.

^[36] See Sch.1 para.3 and Sch. 3 para 3 LRA 2002.

^[37] v Combined English Stores [1989] AC 632

^[38] (1848) 2 Ph 774.

^[39] See s. 20 LRA 1925